Fitch Ratings warn on Kenyan banks’ high exposure to bad debt as defaults rise

Saturday March 02 2024

People in Equity Bank at Kenyatta Avenue branch in Nairobi, Kenya. PHOTO | NMG


A second global ratings agency has maintained its outlook on Kenya’s banks at ‘B’ with a negative outlook, citing the high volumes of non-performing loans.

A ‘B’ rating is considered highly speculative. This means that although the issuer can meet their financial obligations, they are also vulnerable to adverse economic shocks.

Fitch Ratings Ltd said the country’s banking sector has high exposure to public sector debt arrears due to delayed government payments to contractors.

“Loan quality has been affected by the public sector arrears, where delayed government payments to contractors have forced them to run overdue on existing loans to local banks. As a result, the sector regulatory NPL ratio increased by 170 basis points in the first nine months of 2023 to reach 15 percent at the end third quarter of 2023,” said Fitch in its analysis.

Read: Kenya lenders plan to step up asset seizures over bad loans

“The most affected sectors were manufacturing and building and construction, where the absolute amount of NPLs increased by 50 percent in the first nine months of 2023,” it added.


This comes barely two weeks after another global ratings agency, Moodys issued a similar warning and revised its outlook on Kenya’s lenders to negative from stable, citing concerns about high volumes of non-performing loans despite solid profitability and liquidity levels.

“Despite solid economic growth, an array of challenges will weigh on borrowers’ creditworthiness and create difficult operating conditions for banks through 2024,” said Moody’s in its analysis.

“These challenges for borrowers encompass rising interest rates, increased taxes, reduced government spending, high inflation, foreign-currency shortages, and government delays in settling outstanding bills. Consequently, problem loans will rise.”

The volume of NPLs in the local banking sector rose by Ksh133.6 billion ($912 million) to Ksh621.3 billion ($4.24 billion) in the 12 months to December 2023, accounting for 14.8 percent of the sector’s loan book, compared with 13.3 percent in 2022.

Fitch expects retail loans to be significantly impacted by the decline in real disposable incomes as a result of the recent tax increases by the government.

Read: EA banks open to loan restructuring amid surge in defaults

It is also feared that continuing depreciation of the shilling would bolster inflation and exert additional pressure on borrowers’ repayment capacity.

“We expect increased debt servicing costs due to higher interest rates and delayed repayments by government contractors and parastatals to increase sector non-performing loans in the first half of 2024,” Fitch said.

“Impairment charges are the main source of vulnerability for Kenyan banks’ performance. We expect them to increase further as asset-quality risks crystallise.”

The majority of retail loans bear floating interest rates, meaning that debt-servicing costs have materially increased as interest rates have risen.

Higher interest rates have been accompanied by a reduction in households’ real disposable income due to higher inflation and a sharp increase in income taxes.

The Kenyan shilling depreciated 21 percent in 2023 becoming the worst-performing currency in the East African region.

Central Bank increased the policy rate by 375 basis points (BP) in 2023 and a further 50bp in February 2024 to 13 percent to address inflationary pressures and support the shilling.

“We expect the high-interest rates to add to the already-high banking sector non-performing loans ratio,” said Fitch.

Read: Moody’s sounds warning on Kenyan banks' defaults

The increase in policy rate saw lenders such as Equity Bank issue a public notice to the effect that it was increasing its lending rate to 18.24 percent from 17.56 percent.

Fitch, however, expects the Kenyan banking sector’s strong profitability and reasonable capital buffers to weather moderate asset quality deterioration in 2024, and provide room for healthy loan growth.

The agency rates three Kenyan banks— KCB, NCBA, and I&M — their local banking subsidiaries, and Stanbic Bank Kenya Ltd (SBK) at the level of Kenya’s ‘B’ long-term issuer default rating (IDR).

This is largely due to their heavy exposure to sovereign risk as a result of massive investment in government securities. IDR is a measure of the borrower’s vulnerability to default on its financial obligations. The borrower can be a corporate or sovereign country.

“Negative outlooks on the entities’ ratings mirror that on the sovereign Long-Term IDR, reflecting our view that the entities’ ratings are capped by the sovereign rating due to the concentration of operations within Kenya and significant sovereign exposure,” Fitch said.